Under the D-SIB framework, the RBI was required to disclose the names of banks designated as D-SIBs, and to place them in appropriate buckets depending upon their Systemic Importance Scores (SISs).
Depending on the bucket in which a D-SIB is placed, an additional common equity requirement is applicable to it. The additional CET1 requirement was in addition to the capital conservation buffer. It means that these banks have to earmark additional capital and provisions to safeguard their operations.
Background:
- The Basel, Switzerland-based Financial Stability Board (FSB), an initiative of G20 nations, has identified, in consultation with the Basel Committee on Banking Supervision (BCBS) and Swiss national authorities, a list of global systemically important banks (G-SIBs).
- There are 30 G-SIBs currently, including JP Morgan, Citibank, HSBC, Bank of America, Bank of China, Barclays, BNP Paribas, Deutsche Bank, and Goldman Sachs. No Indian bank is on the list.
Why create SIBs?
- 2008 crisis – problems faced by large and highly interconnected financial institutions hampered the orderly functioning of the global financial system – negatively impacting the real economy.
- Government intervention – became necessary to ensure financial stability.
- Cost of public sector intervention, and the consequential increase in moral hazard, required that future regulatory policies should aim at reducing the probability and the impact of the failure of SIBs.
- In October 2010, the FSB recommended that all member countries should put in place a framework to reduce risks attributable to Systemically Important Financial Institutions (SIFIs) in their jurisdictions.
- SIBs are perceived as banks that are ‘Too Big To Fail (TBTF)’, due to which these banks enjoy certain advantages in the funding markets.
- However, this perception creates an expectation of government support at times of distress, which encourages risk-taking, reduces market discipline, creates competitive distortions, and increases the probability of distress in the future.
- It is therefore felt that SIBs should be subjected to additional policy measures to guard against systemic risks and moral hazard issues.
- While the Basel-III Norms prescribe a capital adequacy ratio (CAR) — the bank’s ratio of capital to risk — of 8%, the RBI has been more cautious and mandated a CAR of 9% for scheduled commercial banks and 12% for public sector banks.
Two-step process to assess the systemic importance of banks:
- First, a sample of banks to be assessed for their systemic importance is decided. All banks are not considered — many smaller banks would be of lower systemic importance, and burdening them with onerous data requirements on a regular basis may not be prudent.
- Banks are selected for computation of systemic importance based on an analysis of their size (based on Basel-III Leverage Ratio Exposure Measure) as a percentage of GDP. Banks having a size beyond 2% of GDP will be selected in the sample.
- Once the sample of banks is selected, a detailed study to compute their systemic importance is initiated. Based on a range of indicators, a composite score of systemic importance is computed for each bank.
- Banks that have a systemic importance above a certain threshold are designated as D-SIBs.
- Second, the D-SIBs are segregated into buckets based on their systemic importance scores, and subjected to a graded loss absorbency capital surcharge, depending on the buckets in which they are placed.
- A D-SIB in the lower bucket will attract a lower capital charge, and a D-SIB in the higher bucket will attract a higher capital charge.
